Russia: If Reforms Continue, So Will Growth

The Russian economy, fueled by business investment and household spending, continues to grow at a healthy pace. However, the global slowdown is taking a toll on exports and industrial activity, and growth in 2002 will cool. The key questions in the outlook: How much will lower oil prices affect growth, and how fast will economic reform efforts proceed?

Most economists agree with the International Monetary Fund's recent forecast of "reasonably healthy" 3.6% growth this year, down from last year's pace of close to 5% and well below the record 8.3% clip in 2000. That's when revenues from higher oil prices and the sharp 1998 ruble devaluation--following Russia's default on $40 billion in domestic debt--ignited industrial output and business investment.

Growth was already slowing at the end of 2001. Real gross domestic product in the third quarter grew 4.9% from a year ago, less than last spring's pace. Monthly output data show more slowing in October and November, and a December survey indicates weak demand and bloated inventories.

Exports in all of 2001 fell about 3% from 2000, even as imports grew some 17%, reflecting strong domestic demand. Oil output and exports generate some 20% of Russia's GDP. The government says that 2002 GDP growth could dip below 3.5% if the price of Urals crude falls below the $18.50 per barrel assumed in this year's budget.

Business investment is also slowing, but it is still growing at a solid pace. President Vladimir V. Putin's successful reform efforts on corporate taxes, business deregulation, and banking in 2001 are generating optimism among foreign investors that reform will continue apace in 2002.

These successes triggered an upgrade in Russia's credit rating in November, but further improvement will depend on continued progress, especially in the areas of private property, pensions, and the judicial system. Moreover, if Russia can tear down its array of trade barriers, membership in the World Trade Organization by 2003 would be a real possibility.

By James C. Cooper & Kathleen Madigan

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